Pound Rises as Inflation at BOE Target Boosts Recovery Optimism

Jan. 14 (Bloomberg) -- The pound rose for the first time in
four days versus the euro as inflation slowed to the Bank of
England’s target for the first time in more than four years,
boosting optimism the U.K.’s economic recovery will strengthen.

Sterling climbed the most in two weeks versus the dollar as
a report showed inflation reached the central bank’s 2 percent
threshold last month, helping Governor Mark Carney to keep
interest rates at a record low for longer. U.K. government bonds
erased gains that had sent 10-year gilt yields to the lowest
level in six weeks.

“Abating price pressures would continue to support the
real purchasing power of U.K. consumers and prop up growth,”
said Valentin Marinov, head of European Group-of-10 currency
strategy at Citigroup Inc. in London. “The improving
macroeconomic background should continue to support sterling and
it could be a buy on dips.”

The pound appreciated 0.4 percent to 83.14 pence per euro
at 4:28 p.m. London time after weakening 1.1 percent in the
previous three days. Sterling rose 0.4 percent to $1.6448, the
biggest advance since Dec. 27.

The pound gained 7.3 percent in the past six months, the
best performer among 10 developed-nation currencies tracked by
Bloomberg Correlation-Weighted Indexes. The euro strengthened
2.7 percent and the dollar dropped 2.4 percent.

U.K. consumer-price inflation slowed from 2.1 percent in
November, the Office for National Statistics said. The median
estimate in a Bloomberg News survey of economists was for the
rate to remain unchanged.

Forward Guidance

Carney introduced forward guidance on borrowing costs in
August and pledged to keep the main interest rate at an all-time
low as long as unemployment, currently at 7.4 percent, remains
above 7 percent.

“Given recent declines in inflation, markets are now more
interested in the underlying rate of declining unemployment,
which could show a fall to within touching distance of the 7
percent level,” Michael Hewson, an analyst at CMC Markets in
London, wrote in an e-mailed note.

The Office for National Statistics will release the latest
unemployment data, for the three months through November, on
Jan. 22.

The benchmark 10-year gilt yield was little changed at 2.83
percent after dropping to 2.82 percent, the lowest level since
Dec. 3. The price of the 2.25 percent bond due in September 2023
was 95.13.

The 10-year break-even rate, a gauge of market inflation
expectations derived from the yield difference between gilts and
index-linked securities, increased four basis points to 3.09
percentage points. That compares with the average over the past
year of 3.11 percentage points.

U.K. gilts dropped 1.2 percent in the 12 months through
yesterday, according to Bloomberg World Bond Indexes. Treasuries
declined 2.1 percent, while German securities returned 0.3
percent.